5 Attractive Small/Midcaps Poised for Strong Returns

by: Dan Weiss

Below, is a list of 5 names which I find extremely attractive in the small and mid cap space (several of which are not covered by any analysts at the present time). My research process is focused on those names which are underfollowed, undervalued and have some type of catalyst for value realization over the next 2-3 years.

  1. Highbury Financial (OTC:HBRF): Highbury Financial is a majority owner of Aston Funds- an asset management firm focused primarily in the mutual fund space which has subadvisors including Montag & Caldwell, River Road, Veredus, Optimum, TAMRO and others. The company has approximately $4.7 billion in mutual fund assets along with another $150 million or so in separate account assets. Aston has started 11 new funds over the past year with a total of 26 strategies including the recent launch of alternative mutual funds. The stock is trading for roughly 8x trailing cash EPS (it would be similar on a regular EPS basis except for a charge incurred in the 4th quarter) with strong cash flow generation, no long-term debt and strong recent underlying fund performance.
  2. Hanesbrands (NYSE:HBI): Hanesbrands was spun off from Sara Lee a couple of years ago. They are focused on the underwear and innerwear segments of clothing with the majority of competition coming from Berkshire's Fruit of the Loom brand. The company was spun off with a large debtload of over $2.5 billion and higher than average cost structure. Over the past couple of years, the company has steadily brought debt levels down while at the same time improving the cost structure at the company. This does not mean that the company is without issues as they have had some noticeable increase in inventory and little in the way of sales growth (mostly due to the economic conditions domestically along with a later back to school season) but at a 12x trailing p/e, strong cost cutting and a likely improving overall economy the stock is very attractive at current levels of $24/share.
  3. Exponent (NASDAQ:EXPO): Exponent Inc. was started in 1967 as Failure Analysis Associates as a consulting firm with expertise in engineering and structural analysis. The company has expanded over the years to add expertise into over 90 business areas including regulatory expertise in biotechnology, environmental science and health care. Today, the company employs well over 700 people with revenues of over $190 million per year. The largest single area of business for Exponent is in product liability litigation and litigation support which represents 65% of total revenue. The company is a consistent grower with low to mid teen revenue and mid teen income growth per year. The company has a stellar balance sheet with no debt and over $60 million in cash and equivalents (over $4/share). The company also has solid free cash flow generation with consistent EPS and CF growth.
  4. Allied Defense Group (ADG): Allied Defense Group is an attractive turnaround company in the defense sector. ADG was a classic case where a company overexpanded into non-core areas thus dividing management energy and focus and eventually causing financial distress on the company in the 2007 and early 2008 period. Over the past several months, the company has undergone a significant restructuring where the company has sold its non-core operations in order to better focus management on its core operations in the ammunition business. The company has record backlog of about 4x the market capitalization of the company and is likely to accelerate EPS and CF growth especially in late 08 into 09. The company has the ability to earn over $1.00 per share in 2009 while trading at just above $6 at current levels.
  5. Chyron (NASDAQ:CHYR): Chyron is a leading graphics company which has been in business for several decades. You have likely seen this company product on your television set where the graphics often seen on the lower part of your screen are typically made by this company. I am anticipating an acceleration in revenue and earnings growth at the company over the next several quarters as the HDTV television requirements are enacted in 2009 and due to their new relationship (starting 9/08) with Gannett (NYSE:GCI). The company also has an association with Yahoo Finance for the stock quotes and charts. The company has other potential catalysts with its digital signage program. The stock is trading at an attractive valuation of about 10x my estimates for next years earnings with a healthy balance sheet and solid CF generation.

I will posting information on five additional ideas in the next few days.

Disclosure: All positions are long within the portfolio

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